Federal Funds Rate: What It Means for Your Savings

September 19, 2024

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What we’ll cover:

The federal funds rate can influence the interest rates that banks offer across various deposit accounts.
At the September FOMC meeting, the Federal Reserve lowered the target range for the fed fund rates to 4.75%-5.00%.
Goldman Sachs Research economists anticipate a longer string of consecutive 25 basis points cuts (0.25%) from November 2024 through June 2025.

When you’re shopping for a savings account, we bet the first thing that grabs your attention is the interest rate.

Makes sense! After all, interest rates can help give you an idea of how much you could earn from your deposits over time. Generally speaking, the higher the rate, the more you could earn.

But have you ever wondered how interest rates are determined in the first place? Who’s the proverbial hall monitor?

While interest rates can go up or down for a number of complex reasons, the Federal Reserve (or simply, the Fed) has a great deal of influence over them. That’s why whenever the Fed makes its rate announcement, the financial world hangs on to every word.

Remind me, what does the Fed do? The Federal Reserve is the central bank of the United States. It’s tasked with the important job of maintaining a stable economy by implementing monetary policies to promote maximum employment and stable prices.

In other words, the Fed works to make sure the US economy doesn’t run too hot (long period of growth with high inflation) or too cold (not enough growth).

The “rate” we’re talking about here is specifically the federal funds rate, which can influence the interest rates that banks offer across various deposit accounts, like a high-yield savings account or certificate of deposit (CD).

Reaching your goal starts with saving for it.

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What is the federal funds rate?

In the simplest terms, the federal funds rate is the interest rate that banks charge when they lend money to each other overnight. (Yes, banks borrow money, too. Usually it’s to help them meet their reserve requirements.)

The federal funds rate is set by the Federal Open Market Committee (FOMC), the monetary policymaking arm of the Fed. It meets about eight times a year to discuss and announce new target rates.

The federal funds rate is typically expressed as a range. For example, when the FOMC met in May 2023, the committee announced a target range of 5%-5.25%.

Remember earlier when we mentioned that the Fed’s job is to keep the economy stable?

To carry this out, the Fed has to keep an eye on inflation (among other things) and make monetary adjustments as necessary to keep it in check.

How do they do this? One way is by adjusting the federal funds rate.

Here’s a high-level overview of how it works:

When inflation is too high, the Fed tends to raise its federal funds rate. This encourages people to save more, reducing the supply of money in circulation. The goal here is to help cool down the economy.
When the economy is sluggish, the Fed tends to lower the federal funds rate to encourage borrowing to help stimulate the economy.

To be sure, there are more nuances to this. But for the purpose of this article, we’ll spare you the full-on lecture on monetary policy.

Let’s keep things moving and talk about how changes in the federal funds rate could impact your savings.

Federal funds rate and your savings: What’s the connection?

If you look up the federal funds rate, you may be scratching your head and thinking, “Hey, this isn’t the rate I have on my savings account, what gives?”

It’s important to understand that banks look to the federal funds rate only as a guide – not as a rule. Banks are not required to line up their interest rates with the Fed’s rate. So each bank will respond to the Fed’s rate announcement and adjust rates in their own way.

That being said, when the Fed raises the federal funds rate, banks tend to increase the rates they offer on deposit accounts. On the flip side, when the Fed cuts rates, banks tend to reduce their rates as well.

Now, banks don’t always have to wait for the Fed’s announcement to make a move. Sometimes, the anticipation of a rate change is enough to spur banks to increase or decrease their rates for customers.

A friendly reminder: Keep in mind that rate changes may only impact certain existing accounts.

For instance, if you have a deposit account that offers a variable rate (like a high-yield savings account), you’ll likely see a rate change in your account when the Fed lowers its rate.

On the other hand, some deposit products come with a fixed rate (such as fixed-rate CDs). When the Fed changes its rate, if you already own a CD, your existing fixed rate won’t be affected for the term of your CD.

How Marcus aims to offer competitive rates

Now that you understand why interest rates can change from time to time – you may be wondering how Marcus thinks about rate changes.

Great question!

Our team of experts puts a lot of thought into finding the right rates for our customers. Our primary goal is to consistently offer highly competitive rates across our deposit products, including our Online Savings Account and CDs.

To do this, we consider three key variables:

The value we offer customers over the long term
The federal funds rate
The expectation of the federal funds rate

Let’s take a moment to talk about the expectation of the federal funds rate. Because when Marcus thinks about rates, not only do we look at the current federal fund rate, we also consider how the Fed is thinking about its rates moving forward.

Now, we don’t have a crystal ball. But here’s the thing: Even if the Fed doesn’t announce a rate change, they often signal how they might adjust rates in the future.

Our team at Marcus, along with our colleagues at Goldman Sachs, has been paying close attention to the Fed and other key developments in the economy.

Together, we put our expertise to work for our customers – to determine the right rate for you and share key insights about the rate environment.

The federal funds rate moving forward

At its September meeting, the FOMC lowered the target range for the fed funds rate to 4.75%-5.00%. The committee stated that they are "strongly committed to supporting maximum employment" alongside the 2% inflation target.

Goldman Sachs Research believes the 50 basis points (bps) cut was the right move in light of the good news on inflation and the risk of unwelcome further labor market softening.

The greater urgency suggested by the 50 bps cut and the acceleration in the pace of cuts that most FOMC participants projected for 2025 makes a longer series of consecutive cuts the most likely path, according to our economists.

Goldman Sachs Research now anticipates a longer string of consecutive 25 bps cuts from November 2024 through June 2025.

While it’s hard to predict the future, we hope that this potential rate environment will encourage you to continue to save and work toward your financial goals.

Want more timely insights from Goldman Sachs? Don’t miss our updates at “Heard at Goldman Sachs.”

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this website were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates, subsidiaries or divisions. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. This article is not a product of Goldman Sachs Global Investment Research. The information contained in this article does not constitute a recommendation from any Goldman Sachs entity to the recipient, and Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this article or to its recipient. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this article and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.